Proposed commercial code to reflect modern business realities
Following on the heels of the brand-new Law on Commercial Activity (see "Legal Side," March 13-19 and March 27-April 2), Polish lawmakers are working on another piece of the "doing business in Poland" puzzle by updating the wholly outdated legal regime of setting up and operating companies. When enacted, the proposed Code of Commercial Partnerships and Companies (the Companies Code) will replace those provisions of the existing 1934 Commercial Code that govern issues related to company organizational matters.
The declared intention is to make the law in this area more flexible and more reflective of the realities of modern business. At the same time, as regards companies, the draft Companies Code (the Draft) undertakes to incorporate all current requirements of European Union (EU) regulations.
Most importantly, the Draft is being prepared to be consistent with other recently updated laws involving key business issues, such as the Law on Public Trading in Securities, the Law on the State Court Register, the Law on Accountancy, the Tax Law and, of course, the Law on Commercial Activity. In fact, proponents of the proposed Companies Code have declared it their goal to have the Code enter into force as of Jan. 1, 2001, corresponding with the effective dates of the Law on Commercial Activity and Law on the State Court Register.
As currently circulated, the Draft introduces many fundamental changes. One of the key new elements are descriptions and regulations of new types of partnerships, in particular the professional partnership and the limited joint-stock partnership. The professional partnership is designed for the so-called "free" professions, such as law, medicine, accounting, or architecture. In this type of partnership, each partner would be responsible for the consequences of her or his own professional decisions, and each would be individually liable for any malpractice proceedings.
Limited joint-stock partnerships seek to provide a bridge between a sole entrepreneur or family partnership and a company. Of particular interest is the fact that owners of a limited joint-stock partnership may raise passive capital through the issuance of share certificates and an increase in the company's share capital without automatically giving up control. Under current law, company owners wishing to introduce new significant capital while maintaining absolute control have been forced to execute a series of interrelated agreements, such as shareholders agreements, in order to attempt to achieve this goal.
In addition to these new business vehicles, there is a possibility that changes will be made to the Civil Code to allow for silent partnerships. In this type of partnership, the identity of financial investors in the partnership may be kept secret.
The Draft does not end at creating new vehicles for doing business, but also introduces significant amendments to the requirements for existing types of corporations. The Draft would raise the minimum capitalization of a limited-liability company from zl. 4,000 to zl. 50,000. Correspondingly, the minimum value per share would be increased to zl. 500, ten times greater than under current law. Fortunately, a three-year transition period is contemplated to allow existing companies to comply with these increased requirements.
Joint-stock companies will be faced with even more adjustments. As with limited-liability companies, share capital minimums will be raised. The Draft provides that the share capital of a joint-stock company may not be lower than zl. 250,000. The transition period for compliance by existing companies with this requirement is currently set at five years.
Beyond the capitalization issue, the Draft would introduce changes affecting rights attached to shares. The Draft contemplates the introduction of shares without voting rights. Consequently, the permitted preference for shares with privileged voting rights would be reduced from a maximum of five votes on one share to two votes. Additionally, it may be possible to pay advances on dividends.
Other provisions will regulate corporate shareholders' rights in a more detailed manner. Among other things, the Draft sets forth new procedures for handling challenges to resolutions made at shareholders' meetings, given that challenges by minor or even individual shareholders are no longer uncommon. Most significantly, the Draft reduces the time limit for challenging shareholders' meeting resolutions and provides sanctions for unjustified claims.
In response to the current wave of mergers and acquisitions, the Draft would simplify what is currently a complex and time-consuming procedure. Not only would corporations be allowed to merge with each other, but a partnership could also be merged into a corporation (though not the other way around). Partnerships, however, may merge only by forming a new corporation. Crucial to the simplification of mergers and acquisitions, the Draft provides for a general succession rule. This means that a successor company inherits the entire legal status of the merged entities, including any concessions, permits and exemptions.
The Draft also provides greater flexibility and ease in transforming one type of company into another. Currently, the Commercial Code only allows for the transformation of a limited-liability company into a joint-stock company (and vice versa) and of a simple partnership into a limited partnership. The Draft would open the playing field by allowing nearly all possible transformations, whether that of a partnership into another type of partnership or into a corporation, or that of a corporation into another type of corporation or into a partnership.
Although the new Companies Code facilitates mergers, acquisitions and transformations, it also means much more complex and comprehensive legal regulations than those of the 1934 Code.
This article has been prepared by Lejb Fogelman, the Managing Partner of Hunton & Williams' Warsaw office, with the assistance of Beata Kostro, an associate attorney.
